Healthcare's Low Elasticity Pays Off

Includes: AFAM, CI, ICLR, KNDL
by: Zacks Investment Research

Elasticity of demand is a concept that resides at the core of economic fundamentals. Simply stated, elasticity of demand measures customer sensitivity to fluctuations in price. If price adjustments lead to a change in purchasing behavior, demand is considered to be elastic.

Demand sensitivity is a critical factor when evaluating a companies ability to navigate economic volatility, a dynamic that has become particularly relevant within the last year as our economy has muddled through a number of challenging circumstances.

Automobile makers are a good example of an industry that has been stung by demand issues. General Motors has been suffering huge losses due to higher energy prices, as its customers have shifted away from expensive, gas-guzzling SUV's. Many retailers have also been suffering as cash and credit strapped consumers look for methods to cut costs and save money.

Elasticity and Healthcare

But in spite of the challenging environment, certain segments of the market have held up quite well and continue to grow profits. One of the best has been the healthcare sector, which has a number of factors working in its favor.

There is very little elasticity in this market. Whether oil prices are high and food costs are up, human beings will always need healthcare services. Demographics are also working in this industries favor, with a large portion of the domestic population, baby boomers, heading into retirement and stimulating demand for healthcare services.

So on that note, lets shift gears and look at some healthcare companies that have been scoring big gains and posting impressive results in this tough market.

Excellent Healthcare Stocks

ICON Plc (NASDAQ:ICLR) operates as a contract research organization to pharmaceutical companies in the United States and Europe. The company's July 22 second-quarter results were awesome, including 49% growth in revenue and earnings of 62 cents per share, ahead of analyst estimates of 59 cents per share. The next-year estimate is pegged at $1.61 per share, a 27% earnings growth projection.

Healthspring Inc. (NYSE:HS) operates as a managed care organization in the United States. The company's share price has had a great run in 2008, climbing from a low just over $13 to a recent high over $20. Analyst estimates have risen with the stock, with the current-year estimate advancing to $2.12 per share from $1.90 per share 60 days ago.

Almost Family, Inc. (NASDAQ:AFAM) has also had a great year, posting impressive gains and driving its share price higher. The home healthcare services company reported awesome second-quarter results on Aug 6 that included a 95% jump in income, to $3.9 million from $2 million in the same period last year. The current-year estimate is up to $1.89 per share from $1.51 30 days ago.

Kendle International, Inc. (NASDAQ:KNDL) is a clinical research company providing services to pharmaceutical companies worldwide. This is another company that has done well in 2008, as its stock price has advanced in tandem with higher earnings estimates. The current-year estimate stands to $2.04 per share, up from $1.89 per share 30 days ago. The next-year estimate is pegged at $2.51 per share, a 23% earnings growth projection.


Different industries will fall in and out of favor as economies rotate through their normal cycles. That is why it pays to be sector-centric and focus your attention on the segments of the market that have the ability to stay healthy and grow profits when other companies struggle.